Pivotal Year for Beer

What’s brewing in the beer category? A combination of higher prices, smaller crops, tighter dollars and expanded ethnic offerings may well make 2008 a memorable one for convenience store operators.

A variety of forces are pushing and pulling the beer category in several directions. For instance, the higher prices of items like cigarettes and gasoline have left consumers will less disposable income, which means they may be trading down to lower-ticket brands, which will tempt some retailers to cut margins. On the other hand, having less spendable cash also means many Americans will trade down to beer from wine.

An unexpected wrinkle will undoubtedly be the global shortage of hops, which is driving beer prices up. While a surplus of hops in recent years helped pull prices down and convince growers to plant more profitable crops, the current shortage is hitting microbreweries hard because the beers they make contain much more hops than major brewers use.

As the Washington Post noted in early January, “the new year brings portents of major price increases.” Hang out with some brewers and you’ll hear the phrase “perfect storm” tossed around a lot. A convergence of factors–bad harvests, reduced acreage, burgeoning demand for beer in China–is driving the price of barley and hops skyward. Hoppy beers might increase even more or just disappear from the market as the supply of prized aroma hops dries up.

“I’m not sure there is a huge next,” said Tim Cote, vice president of marketing for Plaid Pantries Inc. a 101-store chain based in Beaverton, Ore. “We already have a pretty developed market for the craft segment.” Indeed, crafts and imports represent between 35% and 40% of Plaid Pantries’ beer category today. “When you have that developed a category, the next big thing is a new craft-type SKU, or a new import-type SKU from some other country.”

Cote and colleagues are anticipating that 2008 will be a year of what he refers to as “retrenchment.” Price pressures, particularly on hops, and in a market being driven by “very, very full-flavored craft beer, probably has more of an impact here than it would in the most of the country.” He foresees some of the unique, full-flavored craft beers that almost certainly taking “huge price increases.”

As an example, he pointed to one craft brew he stocks: Stone Brewing Co.’s Arrogant Bastard Ale. “It is a top 20 volume item for us, or at least it has been.” He is, however, mulling the possibility of having to raise his retail price on by $1 per 22-ounce bottle. “It’s already a $3.29 bottle everyday. It’s probably going to end up being around $4.29 at a probably slightly less-than-average industry margin.”

What lies ahead “is a good question,” added Mark Carter, director of operations for Gordy Fuels, which operates four Tiger Mart Stores in Delaware. “What I’m being told by the two distributors locally is that one of them is up only 1% for 2007, and the other is down 3%. There is actually a third distributor that carries a lot of the malt liquors, and that one is down, though I don’t know by how much.”

There has, Carter said, been a shift in his region from beer to wine. “It’s not huge or anything, but beer sales are at best flat, or slightly down. That’s what we’re seeing.”

Still, not all the beer business is going over to wine. The flavored malt liquors have “tailed off somewhat,” said Carter. “The products that are impressive to me are the two that Miller and Budweiser came out with to compete with Corona.” He is referring to Miller Chill and Land Shark Lager from the Margaritaville Brewing Co. in Jacksonville, Fla., which is being distributed by Anheuser-Busch.

“Clearly, there is an effort to go after that Mexican customer,” Carter observed. “We have seen Corona, which took a price increase, lose some volume in 2007. Dos Equis grew slightly, but these other two (Miller Chill and Land Shark Lager) are really the ones that grew significantly. They have had some good sales.” Heineken Lite, he added, has also proven to be “a very good-selling product.”

Trading DownCarter predicted both a shakeout among craft beers and “a little bit of trade down” among consumers. “The big growth segment in this region has really been, and continues to be, seasonal craft brands. I think that the key is to hold the margin and concentrate on the image of the beer category,” he said. “Make sure the doors are clean, the displays look nice, if you do displays. Again, we capitalize on this beer cave concept, which has worked very well for us.”

Carter said he does not expect 2008 to be better than 2007 for beer, and he blamed that on consumers being left with less disposable income than in the past. “I think that the gasoline and cigarette prices are interfering with other category sales across all convenience stores. That’s my observation.” He has not, however, seen customers trading down to lower-priced beers. “I would say that the mix on premium and sub premium has remained about the same, at least for our chain.”

Despite his prediction, Carter remains “a firm believer that you should hold the margin. When the volume is flat, and when the distributors are telling you it’s flat, what that says to me is that it doesn’t make a lot of sense to try and grow that volume at the expense of the margin. You’re going to end up with the same profit dollars, in my opinion. It’s tempting, perhaps, to discount, but I think the key is that if the distributors are flat, than you should expect to be flat or have just a slight gain.”

Gordy c-stores take advantage of the volume discounts that the major beer companies continue to provide, “and for the most part we take margin on those,” Carter said. “We have competitive prices, but we are not doing deep discounts.”

While competitors make the most of event-based and other promotions, Carter stressed that Gordy prefers to advertise its regular price. “We will put up a banner out in the grass, but it will have our everyday regular price tag on it. I think that doing that gives us a little volume lift.”

Beer CavesAll four Tiger Mart locations include “beer caves,” walk-in beer coolers that are equivalent to about one-fourth of the square footage. Management has them kept at 28 degrees so the customer feels the cold when he walks in,” Carter explained. A fixture with the chain for eight years now, beer caves have helped grow beer volume every year except 2007, he added, when sales were flat. “But the beer cave has worked very well for us overall.”

The company also chooses to do only limited merchandising outside the cave. It also makes use window signage and roadside marquee reader boards.

As part of it beer strategy, Gordy Fuels remains determined to hold its margin on beer. The small chain is not promoting heavily. Instead, it is relying on the beer cave with its cold temperature “and the uniqueness of walking in the cooler to continue our beer volume and growth, and that’s working for us.”

The retailer also has not changed its product mix, which tends to stress variety. Indeed, it carries nearly every major product on the market, and even dabbles in microbrews. “We don’t quite have the space to do a huge selection of microbrews, but as far as domestics and the major imports we carry all of them–and we carry them in all the sizes and packages: 30 packs, 18 packs, 12 packs,” Carter said. “We like to believe we have a product to satisfy all of our beer customers’ needs.” CSD

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